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Topic 2 – Stock markets

1. Equities and primary market

2. Stock market transactions : the Euronext case

3. Stock market quotations : Euronext vs Nasdaq

4. Stock pricing

5. Factors that affect stock prices

1. Equities and the primary market

1.1. Types of businesses issuing stocks

• Partnerships issue membership interest certificates

• Corporations & companies issue shares :

– Private ltd companies & close corporations (SA, SAS)

– Public ltd companies & general corporations (SA offrant au public

des titres financiers)

– Ltd partnership by shares (SCA)

• In France, « offering securities to the public » means :

– communication to people on securities issue

– selling securities through a financial intermediary

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1.2. Common vs preferred shares

• A share of stock in a firm represents ownership

• The holder of 1 common stock/share :

i. has an information right

ii. has 1 voting right at the AGM

iii. receives dividend

iv. is the residual claimant

• The holder of 1 preferred share can have :

– double voting right or no voting right

– higher dividend than common

– priority claim over common stocks claims

Max. 25 % of equity

if listed in France

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As of Dec 31, 2010 :

Shares outstanding 647,921,840

Nominal value….. EUR 0.25

Market value……. EUR 47.020

Capitalization…… EUR 30.5 bn

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Focus on corporate financing theory

Pecking order theory :

1) Cash

2) Bank loan

3) Bills, notes & bonds

4) Shares

Why being listed ?

Advantages

Increase notoriety

Increase CEO corporate governance

Increase capital flexibility & sources

External firm growth

Disadvantages

Information publication (to divulge ?)

Being « prisoner » of earnings

announcements

Rigid dividend policy

Regulatory public offerings

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1.3. Public offering in the primary market

• Origination :

– needed amount of capital

– choice of target stockholders : private vs public

– type of security

– calculation of the offered stock price

• Public offering presentation (french context) :

– conforming with laws : Monetary and Financial Code

– authorization from regulator : AMF

– access to the regulated exchange : Euronext Paris

• Securities selling :

– offered price : fixed price, open price, minimum price

– syndication

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P06/01/09 = 33.41 EUR

Exercise : owning 20 shares (20×33.41 EUR) and cash, you

decide to (1) buy 4 new shares, (2) buy 8 new shares or (3)

not subscribe new shares

1) Buying 4 new shares :

using 17 DPS

paying 4 shares : 98.92 EUR

selling 3 DPS : - 4.96 EUR

2) Buying 8 new shares :

using 20 DPS

buying 14 DPS : 23.15 EUR

paying 8 shares : 197.84 EUR

3) Not subscribe :

selling 20 DPS : - 33.07 EUR

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24 shares

Total value = 20×33.41 EUR + (98.92 - 4.96) EUR

Value per share = 31.76 EUR

28 shares

Total value = 20×33.41 EUR + (197.84 + 23.15) EUR

Value per share = 31.76 EUR

20 shares

Total value = 20×33.41 EUR - 33.07 EUR

Value per share = 31.76 EUR

Euronext Paris :

Market segmentation (December 2010)

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A. Blue chips

1 000 M EUR

B. Middle caps

[150 – 1 000]

C. Small caps

150 M EUR

Euronext (614)

Alternext (145)

Shares Indexes Related securities

Marché libre (246)

CA

C 4

0

CA

CM

id 1

00

CA

CS

ma

ll 9

0

SB

F 2

50

CA

C A

ll-s

ha

re

FT

SE

Eu

rofi

rst

NYSE.Liffe

Next.Warrants

Next.Track

Eu

rop

e

Primary market access :

3 last certified financial statements

IFRS

floating capital 25 %

Looser

market access

conditions

Euronext fee

# [0.1 – 0.6 ‰]

NYSE Arca

Europe

SmartPool

Alt

ern

ext

All

-sh

are

E

uro

pe

2. Stock market transactions

2.1. Largest exchanges as of end Dec 2010

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Investment flows in 2010 (USD bn) Source : WFE 2010 Market highlights.

Market capitalization in 2010 (USD bn) Source : WFE 2010 Market highlights.

Focus on exchanges market shares

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Value of share trading in 2010 (USD bn) Source : WFE 2010 Market highlights.

Market share in % Source : Chi-X Europe, 2011.

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Danone common share on February 22, 2011

ISIN : FR0000120644 ICB : 3500

Shares outstanding : 647,921,840 Market capitalization : EUR 29,299,025,605

Exchange : Closing : Last : Volume :

5:35 pm EUR 45.220 1,696,613

5:30 pm EUR 45.34 593,903

8:30 pm EUR 45.22 3,742

10:00 pm EUR 45.164 1,683

4:00 pm USD 12.31 113,297

Depositary bank : ADR = 1/5 share

3500. Food & Beverage 1300. Chemicals

etc…

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• May 6, 2011 t : – spot buying 500 XYZ at 24 EUR

– ownership transfer on t+3

– delivery/settlement on t+3

• May 16, 2011 :

– spot selling 500 XYZ at 25.20 EUR

– delivery/settlement on May 19

• 10 day-return :

– gross : 5.00 %

– net : 2.95 %

2.2. Spot transactions on Euronext

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• May 6, 2011 :

– buying DSO 500 XYZ at 24 EUR

– opening a « margin account »

– deposit 20 % : 2 400 EUR

– on t+3 : broker pays stocks, seller delivers

• Tuesday, May 25, 2011 last trading day of DSO :

2.3. Margin buying & short selling on Euronext

2.3.1. Deferred settlement order : buying

Decision : settlement, clearing, putting back D. vs P.

Wed. 25 Thu. 26 Fri. 27 Sat. 28 Sun. 29 Mon. 30 Tue. 31

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Decision at maturity :

• Stock settlement :

– paying stocks, receiving them on May 31

– ownership transfer on May 31

• Long position liquidation :

– selling DSO 500 XYZ on May 16 at 25.20 EUR

– 10 day-return : 25 % GEARING

• Putting back for 1 month :

– official settlement price on May 25 : 22 EUR

– position clearing + cost of borrowing 500 22 = 11 000 EUR

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2.3.2. DSO : selling

• May 6, 2011 :

– selling DSO 500 XYZ at 24 EUR

– opening a « margin account »

– deposit 20 % : 2 400 EUR

– on t+3 : broker needs the securities in order to deliver them, buyer pays

• Market for security borrowing/lending

• May 25, 2011 : delivery, clearing, putting back

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2.3.3. Margin buying, short sale… in short

• Buy on margin = agreement to pay securities at a fixed price and on a future date

(hedging = deposit + loan)

• Sell short = agreement to deliver securities at a fixed price and on a future date

(hedging : deposit + security borrowing)

• Euronext Paris DSO securities : capitalization EUR 1 bn and day-volume EUR 1 M, and all ETFs

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2.4. Buying and selling order types

• Validity :

– good-till-time

– good-for-day

– good-till-specified (cancelled)

• Price condition :

– limit order

– pure market order (market peg)

– market to limit order (primary peg)

– pegged order

– stop loss order

– stop limit order